U.S. Oil Refining Capability

A: We have half as many refineries as we did in 1982, and they're not meeting demands. Regulations, practical challenges and economic factors all play a role.

FULL QUESTION

The lack of U.S. oil refinery capacity keeps being blamed for some of the large increases in gas prices. Do we lack refining capacity and, if so, why?

FULL ANSWER

Though oil refinery productivity in the United States has been improving, the number of operating refineries has been dropping steadily. In 1982, the earliest year for which the Energy Information Administration has data, there were 301 operable refineries in the U.S., and they produced about 17.9 million barrels of oil per day. Today there are only 149 refineries, but they're producing 17.4 million barrels – less than in 1982, but more than any year since then. The increase in efficiency is impressive, but it's not enough to meet demand: U.S. oil consumption is 20.7 million barrels per day. Refinery capacity isn't the only factor in the price of gasoline, and according to the EIA it's not the most important one either (that would be the cost of crude oil), but it's certainly a contributor.

Existing refineries have been running at or near full capacity since the mid-1990s, but are failing to meet daily consumption demands. Yet there hasn't been a new refinery built in the U.S. since 1976. Why? Several factors: Building a refinery is expensive, there are a lot of environmental restrictions on where and how they can be built and nobody wants to live near one. One company, Arizona Clean Fuels, has been trying to construct a refinery in the Southwest since 1998. Getting a permit to build took seven years, and the company twice changed the plant's proposed location because of environmental restrictions and land disputes. The refinery is projected to have a $3.7 billion total price tag. The EIA recorded per-barrel profits of $5.29 in 2006; at that rate, the 150,000-barrel-per-day refinery would need to operate for almost 13 years before its profits outweighed the cost of building it.

In short, the reason for not adding more refineries is straightforward: It's hard, and it's expensive. The reason that we have so few in the first place is more complicated. In the 1980s and 1990s, there was a surplus of refining capacity. Then, over the course of two decades, half of the plants shut down. In 2001, Oregon senator Ron Wyden presented to Congress a report arguing that these closings were calculated choices intended to increase oil company profits. Fewer refineries means less product in circulation, which means a lower supply-to-demand ratio and more profit. Wyden's report cites internal memos from the oil industry implying that this reduction was a deliberate attempt to curtail profit losses.

The economic pressures of oversupply could have led to plant closings even without a more calculated decision, of course. In 2005, the head of the National Petrochemical and Refiners Association testified at a House hearing that the rate of return on investment in refining averaged just five and a half percent from 1993 to 2003.

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